Houston's petrochemical industry is booming and helping to stabilize the regional economy, but troubling signs suggest the surge is coming to an end.
The oil crash that has bedeviled the region's oil and natural gas sector is wiping out much of the cost advantage that Gulf Coast chemical plants leveraged against their global rivals. Chemical plants in the U.S. mostly use bountiful and affordable natural gas as their main feedstock, while the rest of the world relies on crude, which was far more expensive until last year.
At the same time, the entire industry is being hit by a global economic slowdown. The variety of plastic products, packaging and automotive parts is linked to the buying power of global consumers. When demand is down, so is the chemical business.
"The global middle class is so important to chemical consumption," Exxon Mobil Chemical President Neil Chapman said. "That's the driver for the growth in petrochemicals."
In the Houston area, a bevy of petrochemical construction projects helped the metro area compensate for the massive loss of jobs from the ongoing oil bust. Ifthat growth slows before a recovery in oil, Houston's economy will lose a critical counterweight to the crude bust, analysts say.
"We still have a lot of (petrochemical) startups coming online here in the U.S., but once we get past the 2017-2018 time frame, it drops off pretty precipitously," said Dave Witte, senior vice president at the IHS research firm who focuses on the petrochemical industry.
Downtown Houston becomes the center of conversation for the uncertain chemical market this week as industry leaders converge for IHS' 31st World Petrochemical Conference. Executives are expected to discuss industry trends and strategies.
Companies already are focusing more on budgetary discipline and protecting shareholder dividends, Witte said. Most U.S. chemical companies' stock values dropped sharply since this past summer. They are still making money, but not necessarily enough to show returns on big new investments.
"People are kind of pausing right now to take a look and try and get a little bit more visibility and certainty before they make the next round of decisions," Witte said of Gulf Coast project announcements. "It's dramatically fallen off from where it was a couple years ago."
Years in the future
The majority of new Gulf Coast petrochemical projects are too far along to cancel, and companies stress they are building to set themselves up years into the future.
In the U.S., the American Chemistry Council counts 266 projects planned from 2010 to 2023 that cost $164 billion to build. Texas would be home for 104 of the projects – worth $51.3 billion – and most of those are in southern Texas, including the Houston area. The council expects those projects to result in 15,800 "direct" new jobs in Texas – not counting construction jobs – and 67,000 nationwide.
Companies including Exxon Mobil Corp., Chevron Phillips, Dow Chemical Co., BASF and LyondellBasell have multi-billion-dollar expansion projects underway in areas such as Baytown, Channelview, Mont Belvieu, La Porte and Freeport. Many will be done in a year or so.
"There's a lot of discussions about the weakness in the global economy, but these are long-term investments for us," Exxon Mobil's Chapman said.
Exxon Mobil is spending billions to boost production of ethylene and polyethylene – the world's most common plastic – at its Baytown and Mont Belvieu plants. The project is Exxon Mobil's first major U.S. chemical expansion in more than 15 years, with completion slated for 2017.
But like many other companies, Exxon Mobil doesn't have plans for any projects beyond next year that would expand its chemical footprint.
Exxon Mobil plans to export much of its Gulf Coast products to the developing world.
"It's really an export machine," Chapman said. "The fundamentals haven't changed. We see economic cycles all the time."
And experts say at least in the short term, there are questions about the global economy, including China.
China has been responsible for nearly 60 percent of the growth in global demand growth for petrochemicals the past 15 years, Witte said. That was due to its own growth but also because of its manufacturing base. It imports chemicals and plastics and then sends them back out in packaging or in finished products like toys.
"There's a lot of concern over how China has moved to a consumer economy" with less cheap labor and manufacturing, Witte said. "That has people concerned over what it means for demand growth in chemicals."
But Chapman still expects long-term world growth, citing the projected increase in global population and the fact that many people worldwide will be joining the middle class. Exxon Mobil is also opening petrochemical plants soon in Saudi Arabia and Singapore.
Saudi Arabia's growth
Apart from the Gulf Coast, Saudi Arabia has seen the largest global wave of petrochemical growth. But even the Saudis are looking to break the link between their petrochemical production and oil and natural gas prices.
State-owned Saudi Aramco just announced plans to make more specialty chemicals, which are linked to the performance of the products they are used in, so there's less price volatility. Specialty chemicals are used by industries ranging from pharmaceuticals to perfumes to construction.
So-called base chemicals like ethylene – the primary building block of most plastics – are tied to oil and natural gas prices, and they rise and fall with the markets. All ethylene is virtually equal, for instance, but some specialty pigments or resins made by one company may function in certain products better than those made by competitors.
The Saudis aren't alone in looking to cash in on specialty chemicals, noted Adrian Beale, vice president of specialty chemicals at IHS.
"Because they're not such homogenous products, it's not as easy for buyers to switch from one to another," Beale said, adding that shareholders like the stability of the special chemicals business.
But the problem for Texas is that nearly all of the boom here has been fueled by base growth. Much of the specialty chemical growth will be in developing areas such as China, India and the Middle East, he said, closer to where product consumption is occurring.
If oil prices jump back up, Beale predicted some new petrochemical projects could emerge, but he doesn't expect the growth of recent years to repeat.
"Even if oil prices go back up, we're not expecting them to go back to the heights where they were before," Beale said. "Even though the U.S. will have a kind of advantage, it won't be as significant."